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Insurance

Agriculture.com Staff 02/26/2007 @ 8:13am

As February comes to a close, insurance coverage levels and costs will be known. This may help you make planting decisions, but remember that insurance should be viewed as insurance and not a marketing plan.

With corn prices skyrocketing this year, high coverage levels provide an attractive price floor. However, be sure you take into account the cost of insurance and exactly what your policy will or can do for you.

It is hard to imagine that today's farm operations can go uninsured. Whether you are a young farmer just starting, or someone who is well established, today's agricultural structure has changed enough where it is unlikely that you can afford a significant income loss for even one year.

Competition for land as well as input cost is too strong. With farmers concentrated on one or two crops, times have changed. Unlike the "old days" when you may have had livestock and four or five crops, you were not as diversified as today. Therefore, when looking at your insurance this year, make sure that you find a level of coverage and premium that best fits your operation. However, keep in mind that insurance does not market your grain. You need to be strategic. Marketing may be the last frontier that will separate good farmers from great farmers.

Note that many of the insurance products perform like a one-month put option against lower price value. If you compared insurance against purchasing a put option, you have more flexibility in coverage with a put. As an example, if you purchased a $4 December corn put and prices crashed into late June on ideal weather conditions, you can execute a strategy to keep this gain. However, with insurance, prices could crash into June and then rally sharply back in the fall to $4, and you may collect nothing.

Lastly, some insurance products have caps on collection amounts. With record tight inventory and big demand, market price swings could be absolutely gigantic in the year ahead. Make sure that your insurance coverage works for you. As an example, some insurance payments are capped at $1.50 per bushel for corn. If that is the case, you may want to purchase a $1.50 out-of-the-money call or put option for further coverage. A big price rally will likely occur on a drought when you may not have the grain you are obligated to deliver.

If you have any questions, comments or would like us to outline a strategic approach for you, please contact Top Farmer at 1-800-TOP-FARM, ext. 129.

As February comes to a close, insurance coverage levels and costs will be known. This may help you make planting decisions, but remember that insurance should be viewed as insurance and not a marketing plan.

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